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tv   James Freeman Vern Mc Kinley Borrowed Time  CSPAN  December 30, 2018 10:00am-11:03am EST

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>> good afternoon, ladies and gentlemen. i'm george selgin, director of potatoes institute at the cato institute center for monitoring a financial alternatives. i'm very pleased to welcome you all to today's cato book forum. the subject of which is the book "borrowed time: two centuries of booms, busts, and bailouts at citi" by james freeman and vern mckinley. i'd like to begin our discussion today introducing our panelists
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starting with the authors. james freeman immediately to my left is assistant editor of the "wall street journal" editorial page and the office of the journals best of the west column and newsletter. vern mckinley, to his left, is an attorney, financial analyst, policy analyst and author whose specialty is international central banks, operations in deposit systems and policies. christy ford chapin is an associate best of 20th century u.s. political and economic business history at the university of maryland baltimore county and also a visiting scholar at johns hopkins where she's working on her own book entitled flexible finance, finance capitalism and the evolving culture of risk. finally, gary stern, was present
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and ceo of the federal reserve bank of minneapolis from march march 1985 all the way through august 2009 which i think is think is some kind of record, isn't it? second-longest. he's also the co-author with ron feldman of too big to fail, the hazards of bank bailouts which was published by the brookings institution in 2004. thanks to all of you for taking part in this discussion today. i'm going to start by asking several questions of the panel, and after we're done discussing the book amongst ourselves, then we'll open it up in about 45 minutes to question and answer from the audience, after which we will conclude and take part in a reception. so i would like to start, james
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in vernon, by asking to press for obvious question which is why did you choose to write a book about citi and in particular i'd like to know whether that was because you consider their story unique or because you think it illustrates or pervasive problems with our banking system policies? >> i decided to get involved because vern said we should write this book. maybe vern should tell us and that i will set i thought it such a great idea and wanted to pursue it. >> fair enough. [inaudible] >> speak up a little bit. i'm not sure if it is your mic. >> but, i mean, the real genesis of the book i think was this whole idea of serial bailouts,
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serial bailouts that you multiple times over and over again, and individual institution, in this case, citi, at five brushes with death over the last 100 100 years since te federal reserve was created. james was working on editorials on systemic risk eight or nine years ago when we crossed paths and i was working trying to get documents on lot of those issues. it seemed like a pretty good issue for us to tackle. of course, citi isn't the only one that is come close on this matter. there's a couple runners up. you've had chase, jpmorgan chase and its predecessors have had these bits of instability. bank of america and continental
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illinois came together with their own separate paths back in time with had instability. but i think one reason to track citi was because of the lineages, the lineage back in time was a lot more clear. you have from about 1812 through the 1990s where there wasn't much in the way of mergers. it was mostly just organic growth, so it's an easy path to follow what is an institution is a lot more complicated path to kind of unwind everything. then the last issue i think to mention is that the stories that we found as we dug into citi max history were just perfect for
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james journalistic storytelling approach. that's not the primary reason we went with it but once we decided citi was the one, that was somewhat, yeah. >> that was a bit of an extra bonus for us that there always personalities throughout history that lend themselves to storytelling. >> george, i should thank you so for having us. we benefited greatly from your work and thank you for bringing these esteemed scholars to talk about. it is the classic too big to fail bank. it was the country's largest bank for much of its history, one of the largest. what was really striking about the research vern date is you have this long time when it's an independent institution when that only is it stable, it's so strong that it actually rescues the government on occasion. it becomes a magnet for deposit in time of crisis.
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roughly since i century since it's been guided come heavily regulated, protected by the federal reserve we've seen this at a think that's what i think makes it a really important case study as a look at the too big to fail problem. >> james, you anticipated a question i wanted to ask in pointing out that citi, which we know is one of the largest banks in the country today, if indeed it isn't the largest, i think it is now the largest, in any event it is an top four, but as you mention that invictus also one of the largest way back when it first started getting into trouble and being rescued. this was in the 1920s if i'm not mistaken. but was there in fact, implicitly at that time a a non
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of too big to fail? that is, can you say that the rest of citi at the time involved discussions of the size, interconnectedness, the sorts of things that are used to rationalize bailouts of large banks in more recent times? or with the arguments distinctly different? >> we think of too big to fail, i think the experts on the panel would probably say that term really didn't, was a throw around much until the 1980s perhaps. what you do see in that time which is really striking is how right around the creation of the federal reserve, this goes from a model financial institution run by, i would say a tough -- the historians of the time called in as a michael vettor, james stillman poring over the portfolio look at every credit,
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asking a person questions of people who wanted to borrow money, very high levels of capital, very liquid bank. then we have the creation of the federal reserve in 1913, and less than a decade later after the disasters overseas investments they are borrowing heavily from the new york fed. so i don't think too big to fail came in to view for a long time. that term certainly was not going but it i think we see their real historical transition from a more or less free market in banking to one dominated and controlled much more by government, and the results have not been entirely positive. i think we maybe want to talk about what this has given us in the more recent time and what federal regulation by banking regulators yielded versus what
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they call shadow banking,, meaning the part of the financial system they don't control. >> in 1920 you actually had three institutions that were somewhat about that time in new york city. you have not only citi budget guaranty trust and you also chase manhattan. i think that is definitely worthy of some follow-up research to see if there was in more detail, any coronation between the process for propping up all three of them. all three of them to discount window lending in excess of 100 million can which back in those days was quite hefty. there was a big burst from about 1917-1920, and a lot of it was centered around new york and the discount window, if you look at it over time. >> i probably worth pointing out that this was a time when plenty
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of banks were allowed to fail. they were mostly fairly small and the 20s, i think something like 5000 banks failed and almost as many again in the '30s, if not more. so that presumably that had something to do with it. but i wonder if the new york fed may also be a little bit special in this story. i will maybe leave that for contemplation by our other panelists. i'd like to pose a question to christie next, in light of your work on attitudes towards risk and evolution or development in 20th century american economic history. how do you see citi's story as byrne and james tell it fitting into the general pattern of this country, first of all the
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general financial development but particularly it's evolving culture of risk? is that story representative of general trends going on in the country or that perhaps the source inspiring some of those trends? what you say about that? >> i think the book does a good job of showing how at citi become particularly particular people at the head who are willing to make bad bets and one with low liquidity and not very well capitalized. what i'm looking at in my research is after world war ii of courtship of banks are very cowed at this bank having come to the great depression and 20s and 30s, 15,000 banks are gone. they fail. so they are very conservative and careful of come out of world war ii.
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but what i would say i was surprised that was because policymakers are caught up in keynesianism, they are interest in pushing consumer credit. this is when the banks are changing a lot. this is something that vern and james do a good job at showing in the book as well have the bank changes, used to do, the wealthy, delete, approach the bank and asked to open an account. at citibank is on the forefront even before the great depression of moving out to the little people and opening up small accounts. there is little bit of rain in the 20s but that's unusual. what you see after world war ii that i find so interesting is you start to see attitudes towards risk changing and partially there's a political story going on with, for example, look at home mortgages. a lot of your familiar with the fha and the v.a. and the federally backed mortgages. the banks were thrilled to get this bailout in the 1930s through the great depression from the federal government.
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they were thrilled to get out and load again with the guarantee that if the loan with the south they would get back a good portion of the capital. what happened after world war ii is almost every single year there was a proposal in congress to liberalize the terms come extended to 15 years to 20 years as all the worry of very familiar with the 30 year mortgage. that was unheard of back then. let's have less and less down payment, less and less interest. it's a great deal for the consumer but it's a problem for banks to put these are long-term nonliquid mortgages on the books. what a fat is there's this interesting game going on between private actors and the government where the banks are trying to defeat these liberalization by lending more, showing up as if the progress report to the committee hearing saying we're doing a good job, reaching for people, and please don't liberalize these new
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legislation. one thing i thought was interesting in the book is you mentioned this with the lending to foreign governments, particularly lesser developed countries. that got me thinking i really need to go out and adopt this before, go research that because this is a foreign policy story. so is putting home ownership, we need to look better at saving since the cold war prick you have a interesting piece of where the united states needs to be seen, i'm sure this is, they're attacked tech relatione soviets but also thinking about what the come is pushing with consumer credit, lending. i started looking into the student loan part, perhaps another bubble that may be bursting at some time. i found that there and also want to say i urge you to purchase the book. >> thank you. >> there's a lot of interesting, a lot of good information but they do a great job of telling
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the story, and that's what i was very impressed with. >> if i could just add on that. it is really striking, you saw in the 1920s essentially citi looked at the american saver and said, they bought war bond, maybe you be interested in buying all kinds of bonds, maybe stocks. but this drive to bring democratized credit and banking and of the financial services was built on the idea that there was a market that other people were not capturing and we can. you are right, you look at recent decades, so much of the drives in a particular market are about political motivation and encouragement, whether it's lots of federal activity to attract people into the mortgage market before the last crisis but also in the 1970s this was a big part of their lobbying strategy. we go to the end of book whether wanted to run with very little leverage and a wanted, they were
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getting a lot of credit from politicians are pushing banks or pushing loans to less developed countries. it was seen as a very positive thing for the world, for american foreign policy, for just about everything really until -- >> so they were like the countrywide of the third world. gary, you of course wrote a book about too big to fail. right at the time when it would've been, it should been most useful to make the timely changes in the financial system, but i don't think all of your advice is taken, you wrote emphasizing the role of moral hazard and the dangers of bailouts, and predicting that the regulations before the crisis, particularly the fdic
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improvement act would not prevent more to the to fail a lapse. -- too big to fail bailouts. to what extent do you think the episode during that crisis illustrates the predictions or bears at the predictions to meet in the book, to what extent do you think it was, in fact, a very unique case? >> no, actually don't think there's much unique about it with perhaps the exception of the magnitudes involved. but other than that i think it was predictable given the incentives in place, given the precedence in place. that's not to say, i quote you chapter and verse on the purchase of our book, but our book did not try to identify the institutions most likely to fail in the next round, nor did we try to predict exactly when it
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might happen basically because we had no idea. i think we did have some insights that were valuable and, unfortunately, were generally ignored, and that had to do with the incentives that were in place, some which have already been discussed, which led to misplacing of risk. risk was priced too low. bankers like the rest of us respond to what they observe in the marketplace. they respond to prices, respond to incentives. it's not that they want to run the bank into the ground, but on the other hand, if they see something that looks like it is priced to be a good deal they will try to take advantage of it. that was part of the setup, part of the problem. it's why, by the way, citi next history was particularly fraught, and i, too, enjoyed the book and learned a number of interesting things from it, but
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if we look back at the crisis it was not exclusively a citibank. if it probably would've been a much more, much less challenging crisis. what we observed i think was problems that pervaded a good chunk of the financial system that were identifiable in advance, that in my judgment could have been at least partially addressed in advance, which would have hopefully lead to a less severe crisis from a number of metrics. but we can't rewrite history. we are where we are. >> could you tell us a little bit about what he tried to do and what he felt it wasn't adequate at the time, to reign in too big to fill? >> fiduciary, think a principal part of one of the principal parts and that it was too big to
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fail was prompt corrective action was basically talked about regulatory intervention while financial institutions still had positive capital, possibly with. a big flaw in that was cut wasn't market value can wasn't based on market value accounting was based on book value or historical accounting. you kind of know in the financial world when you see that that problems are looming. now, a lot of people recoil when i talked about market to market accounting with banks. but as a say in minnesota, it takes a model to be a model. which means if you don't like mark-to-market accounting what do you like? whatever you might say about mark to market accounting, which in our proposal at the end of the day was part of it, you've
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got market assets to market. yes, thanks have some fairly opaque obscure asset on the books, but we live in an age where information is much less expensive to gather and analyze that was 20, 30, article 50 is go. i don't find it a a credible excuses have a safe we can't value these things in any contemporary nest way. that just can't possibly be true. can you value them down to the last dollar? probably not but you don't need that level of precision. >> my follow-up question really for gary but also for the other panelists, so since the crisis of course another round of reforms, without dodd-frank and all that it involved. so does that do much in the way of reducing the likelihood of
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citi or any of the big bank being rescued in the future? >> i have laid off and i will try to be concise. i've actually cautiously optimistic about the implications of dodd-frank, and in particular about the recovery and resolution plan or living will mandate in dodd-frank. there are several reasons for that. first of all, dodd-frank does mandate and major financial institutions have produced living wills, that is, how they can be wound down over a weekend without imposing undue costs on other financial institutions and financial marketplaces more broadly, or the economy. the first round of these things, they were not rubberstamped. i can't testify to the quality per se, but regulators rejected early submissions. so everybody as far as i i can
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tell is taking it seriously. it's part of the law, mandated in dodd-frank and regulators have decided off on it. while this isn't the only thing that should be done and must be done, it's an important first step because it's preparation to dealing with the next problem or series of problems at large, complex financial institutions. so i think there's a reason for guarded optimism that we are in a better position to deal with at least those institutions at the next point where financial difficulties have risen. and that's very critical. it's not the end of the story for a number of reasons, i won't dwell on all of it, but i will say the are a couple of things. one is the quality of the plans themselves. the understanding of uninsured
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creditors that they could well lose money. i think a lot more communication should be done about the nature of the change in the regime so that uninsured creditors understand whatever they make in the past, the position going forward is different. and policymakers at the end of today will have to have confidence in his plans that they can be committed without imposing the undue costs. >> what do you to say based on your reading of history of citi? could this be a device to make it less likely to get mail out next time it screws up? >> resolution plans are a good step, we are actually no idea how that's going to work in practice. they haven't been tested. these plans from what i've heard can be thousands of pages long,
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dealing with thousands of subsidiaries and it will be interesting when that program is put in place in an actual crisis. as far as the legal infrastructure and dodd-frank, i'm just very skeptical. what happens in almost every crisis is the rulebook gets thrown out to large extent and your new legislation. in the last crises you had tarp, mostly used to prop up the big banks and hera was to prop up dan and freddie and they are still lingering in conservatorship now. and you've had that in the past. in the '30s you had reconstruction finance corporation, new law in the middle of a crisis. so i think whatever the legislative framework is right now, i i wouldn't say is completely irrelevant, but because when a crisis comes you
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will probably have legislative change, it's certainly not set in stone. >> may i add a little something to that? >> yes, please. >> it makes me think of this immature type of institutions and banks and bailouts but i don't want to lose sight of the little guy, the consumer. there's a lot about consumer protection in the dodd-frank act. i'm thinking about a a documens made in 1970 called banks and the poor, and there's this image of the woman crying because her house is being repossessed by the bank over not a lot of money that is owed. you have that image, markets, thinking of this very well known, respected banker ahead of citibank or does retire until the '80s. he's a huge proponent of free enterprise. he loves to talk about it, write about it, very vocal about it. you have this image but then you see though woman's house getting taken with but yet that never happens to citibank. they get bailed out time and
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time again, and it's a very jarring contrast. >> it really come it was jarring. i think risk has developed because of the writer, the kind of very positive reputation among people who like free markets and like free enterprise. he was like a lot of people he was all for them until it was his interest at stake, and then he encouraged government intervention, and i think the whole premise of their strategy, we talked about the last american lending, is also famous for saying that countries never go bankrupt. he somehow persuaded a lot of people in this town to believe that lending to developing countries was as safe as it gets, as safe as lending to the
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u.s. treasury. obviously, that didn't turn out to be the case, but the distance between risk and rhetoric and the reality of citi in that time was quite large. >> we do have, there is a tension here, at least it seems to me, when we think about the good old days and say before citibank started having trouble in it and several other big u.s. banks were famous for being solid. they had all this gold and other banks that just put their money in securities and no loans practically. that sort of thing. but these are also as was mentioned banks that for the most part were daily with relatively well-to-do, wealthy people, and not ordinary depositors and survey didn't
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make loans to regular folks and yes, they didn't make loans to the third world. they were not generous and the mortgages. but i bet very many people could imagine going back to that kind of world, though there are certain proponents of reform might take us there if we were to follow their advice. ..
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leading the way on bringing lots of people into the financial system who in an earlier era wouldn't have had means to do that. they weren't the reason they got into trouble. it was overseas investment. it's not that they overdid it with american consumer so much. i would also point out i think it's the constant problem in this town especially it is seen as all upside when -- when government is encouraging banks to expand credit with the premise of a bailout if they run into trouble, allowing them to run with high leverage and to make loans to especially housing it's been a problem but we do have to remember what the cost was to the average person in terms of the slow growth that really persisted for most of a decade after the last crisis, having rock-bottom interest
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rates engineered by the fed to somehow growth after the last crisis. so the bill will be paid but often later and for many years afterwards. >> any further thoughts on that? >> well, i wasn't going to comment on that but if you -- >> just go for it. [laughter] >> i guess i want to underscore again just looking at history, american financial system, i think probably people here in the audience know a little bit about history of banking than your average american but i think most people don't realize that compared to europe and canada we had system, branches that weren't allowed to tie and
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everything goes under, you couldn't move money around easily even with corresponding banking system. money flows into new york and gets pulled back out depending on the season and what is needed and a lot tied up in loans. we have banks and split them with investment banks and commercial banks, unusually fragmented very fragile system. the understanding that they'll be bailouts, it's very problematic. >> i think you make a good point, christy, i always thought it was the great tragedy of american banking history that we endured unit banking and finally
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got away with it when too big to fail was in the saddle where that happened in the 70's and so now next thing you know we have the opposite problem of banks that are getting too big and expecting that they must -- that they can rely on bailouts as a result. at least that's one way of seeing things. can you have -- can you have big banks and not have this dilemma? there used to be a lot more discussion about breaking up banks that were too big to fail. that seems to not be happening so much. gary, do you know why we don't hear too much about -- >> neil came out with proposal
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to shrink big banks. it's not a proposal that i'm enthusiastic about. you know, it's kind of nice to say, well f they're too big to fail, they are too big but that's a slogan. that doesn't tell you what you ought to do in policy sense. and besides we all know that size alone is not -- is not going to tell you what needs to be done. it has a lot more to do with complexity and so forth. i mean, i guess i would say we shouldn't be surprised that there are losses in market capitalistic economy, you get the upside, you should get the downside. the problem is, of course, that the down -- people who should have gotten at least a part of the downside didn't get it and i alluded earlier to uninsured creditors, if you're equity
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holder, you lost a lot of money or lehman brothers. your network depending on how many shares you had, net worth took a very big hit but uninsured creditors on the other hand that's a different story and that's where -- that's where the rubber hits the road and too big to fail. as i already commented, i think the living real aspects of dodd-frank had the promise of helping in that regard but having said that, i agree, you know, it hasn't been tested, legislation could come along and undermine it in a crisis. you know, whether that's good or bad would remain to be seen, cost-benefit question. it's not obvious that all -- that all too big to fail actions are bad. it all depends on what the cost of not doing it would have been
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and -- and in a crisis, you know, you don't have the luxury of doing those kinds of calculations at your leisure. you got to make decisions and we shouldn't be surprised, that not all decisions made in the midst of serious crisis with the benefit of hindsight, we shouldn't be surprised that they don't like lies or just in some sense. you know, it would be great if policymakers were significant clear voyant, they're not, they're people like us. >> i would be skeptical of the idea that you have plans to break up the banks. i mean, who is going to do that? it's going to be the regulators and supervisors, they are conflicted. there's this idea that there's optimal level or optimal side for institution and i can't see at all that that's a concept. >> i think the directors of
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these organizations have real responsibilities just to follow up on vern's point. i'm not a director but if i were you would be pressing management really hard about what line of business does really make sense to be in and what lines don't, what geographic and what geographic reasons don't make sense. all those kinds of questions. all directors have a role to play and maybe they are doing it. i'm not a party those, you should be asking serious questions. my wrap-up question for everybody, i think i would like to throw a little bit of a curve ball, summing up the lessons we
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should draw from citibank's story but i actually like to particularly ask the authors what would be the wrong lesson to draw from your book, what's your -- if you had to worry about a reader reading your book and reading the wrong conclusion out of the story what that might be and can you warn us against it? >> i mean, i am worried that a supervisor looks at this and says there's menu to bail out institutions, that's certainly not -- [laughter] >> how-to guide, we can do it this way, we do it through central bank or capital program or, you know, the whole laundry list as you go through. do do you worry that people say
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it's unique, the guys written the book about it obviously because it stands out but that's just citibank, we don't have to worry about other banks. >> i don't know if broker pushed away by the book, the ongoing problem of lack of transparency. i mentioned earlier, shadow banking which the fed and other regulators use today refer the financial system that they don't regulate is much more transparent. you will hear a lot in tenth anniversary review of the crisis, the entire story. citibank was overseen by multiple federal regulators and nothing in the shadows and not covered. the entirety of the operation was overseen by bank regulators
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and as we look back and whether it's citi or other banks, we are limited in that way because records of bank examiners are basically withheld from public, typically request is denied because it's confidential supervisory information and then after a few decades, the records are destroyed on a regular schedule that the fed operates so if there's one take away, move toward transparency at least when it comes to history. we couldn't get records on 1920's lending. we point out in the book, it's easier to get records from 1860's than it is from the period of the federal reserve. this really is indefensible i believe and i would hope that --
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that there would be recognition of that in this town. >> yeah, as historian, a little piece of me died when i was reading the passage of the book about valuable records being destroyed and those are our records, but no we can't angst it. >> if you can't at least retrospectively look at what happened in these cases, odds of being able to do better in the future are not as good as they might be. that raises quick question i wanted to ask gary about too big to fail crisis, when you wrote your book, it hadn't extended to investment banking at all. that's not something that you anticipated. that raises the final question about a whole role of investment banking and with respect to citibank glads -- glass steigel
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or any of that. glass stegel and role played in most recent problem. >> you'll have to ask citigroup experts. none of whom were commercial banks or did any commercial banking business so far i know, so i personally don't think glass stegel played much role but i would differ to people that looked more carefully. >> as far as what we found on research on the 30's which was the negotiation of glass steigel, i mean, before i started looking into this i really thought the history was that there was instability that
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washed over from the investment banking side to the commercial banking side. because of those cities citi -- >> right. >> before glass steigel. we found no evidence of that. they got into trouble in late 20's and early 30's but it was the international side, germany, chile, a number of other countries and that put them on the brink. they got money from the reconstruction finance corporation, similar to what chase and continental did, but maybe i was naive going into it or i had gotten bad information but there was never really any spillover from the investment bank to commercial bank. they were worried about it and we found in some of the communication between the examiners and occ headquarters that they were concerned about it and they wanted details on ncc national city corp.,
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investment banking affiliate but there was no spillover and i think that was urban myth that hopefully we can work to dispel. >> same thing in 2008? >> well, i would say in 2008 you did have problems in investment bank but you also had them in commercial bank, i think one of the myths of 2008 people we wanted to blame financial instruments, whether credit default swap, debt obligation and different analyses of the crisis have tried to make a point that one instrument being less regulated, aha, that was the problem, you look at citi and the problem was housing, the problem was widespread and within citi what you see commercial bank, investment bank, big problems, big losses on housing across the board from
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the most simple instruments to the most complex. >> and of the 5 times that citi did get in trouble, every time there was a big problem on the commercial bank, the credit side, the lending side and the investment banking side wasn't the core of what was -- what the problem was. >> thanks, we are going to open it up for the last 15 minutes or so, perhaps a little less to the audience for questions and answers. please wait for the mic to come to you before you ask your question so that everybody can hear and say your name and affiliation before making -- asking your question and do finally ask a question rather than make a spiel or something like that. ly take two questions at a time, one, two to start with so you both have mics ready and whoever
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gets the mic first can start. >> do you have a question here, sir? >> direct your question to a particular speaker if you can? >> cato institute, i would like to ask surely you need better definition of what the word rescue means, in 2008 certainly depositors of citibank were rescued but the share price, peak close to $60, one point at so-called rescue. even today it's gone up 6 times or 7 times, it's still about -- you lost 09% of your money. so higher lost 90 to 99% of my money, is the word rescue appropriate? don't you need to use a different type of question, the question i had, suppose the bank had been liquidated would have
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gotten less money than they actually had? >> it's a rescue of uninsured creditors, it's a rescue of the institution, it's often a rescue of the board. boards often don't want to go through a bankruptcy process. not so much fun for a director but it's mainly in terms, i guess, differ to the others but in terms of studying the impact but it's the -- it's the creditors who have that belief and vindicated in 2008 that they will be covered in a crisis. >> and as far as your mention of 90% drop, that's assuming that you sold at the absolute worst possible time at the bottom and, i mean, you're right in most cases liquidation scenario, the
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shareholders would be out but the -- >> the problem is, i wouldn't make a distinction between shareholders and creditors, i would make a distinction between insured and uninsured creditors, $100,000, and you had $15,000 in the bank, you appropriately expected that your $15,000 was protected and you had no concerns and no incentive to monitor the bank one way or the other. but if you're a corporate treasurer with $5 million in citi, protection should be 100,000 and you got 4.9 million at risk but wasn't really at risk in too big to fail institution and that's problem because corporate treasurers are not fooled, they know they are
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protected and they -- they similarly have no incentive to monitor the bank. >> the point i was trying to make is just the differential treatment of all the institutions if you compared what happened to lehman brothers versus washington mutual, versus bearstern, versus fannie and freddie, it's across the board that was some of them made out pretty well whether it's bearsterns, 6 or 8 years into the future. i think that was one of the big issues about uncertainty for the creditors, everybody got treated differently and there was no rime or reason to how the decision-making was being implemented. >> hi, eric with adventures, my question for vernon and james.
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america has long had one of the most developed politicized banking systems in world which may contribute to the periodic banking crises and bailouts of politically-connected banks, could you speculate on any pads that you might see to less politicizing banking system and where the market plays a better role in regulating the banking system? >> i think i would love to see politicians just start shrinking the safety net and i understand that you can't announce that tomorrow but all the rules have changed but just an incremental process back toward that model that worked will and benefited from george's work, even while the government was making a lot of mistakes in terms of restricting the money supply and unit banking and the rest of it, you still had banks that were
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free to fail and the economy that was growing i believe at 4% or better in real terms for the last 3 decades in the 19th century. >> during the next crisis. the regulators whether it's occ, fdic, the fed have a lot of discretion and it really is important who's in those positions. if you have people like mark who was here at cato for many years, he's working for vice president pence as chief economist. if someone like him ends up in one of these positions and it's the decision-mairk, i have a lot of confidence but it's really a crap shoot as far as who is going to be in power who is going to be at treasury and the fdic, occ and the fed and i
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don't think there's a silver bullet when we know the line-up of people who will be making the decision. >> if i could interject because my name was brought up in connection with the question. actually the united states in 19th century would not be connected by stretch of imagination. it had as many problems but canadian system had fine history both in 19th century and most recently showing great deal more resilience and part of the secret is that they avoided the extremes of unit banking, first of all, they allowed a developed system to grow with banks that were sizable but without more --
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more competitive system and without inviting too big to fail and resisted guaranties a lot longer and we still do as far as i could tell but certainly i think that we need to look beyond u.s. experience to find some good examples of institutional arrangement that is we might find. >> we did found a lot of problems of banking in that era. but what you would like to bring back is that phenomena of a bank er like james feldman running citi. >> a couple more questions there and there. and i see your hand and we will have i hope to get to you.
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>> hi, tom gaspard, local potomic, maryland. i spent my life at citi up until the year 2000 and my question is about -- i want to go back to this issue about commercial bank and backdrop, when i got back there, he was a god, i tell you, i don't know that he thought the government would bail him out. i never got the chance to ask him but one thing was for sure, these places were publicly-owned companies and competition was -- that's all we heard, competition, we wanted to be kings of the hill. i was on the consumer side but makes no difference, all sides wanted to be kings of the hill,
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masters of the universe followed by john reed who pushed the consumer side hard but throughout all of that, competitiveness, customer kind of strategy, in 1998 in your book, reed having had enormous pressure from the street to get to the investment side of -- to make a mega bank, the culture changed. it wasn't just a customer strategy nor culture. it was a deal strategy and so my question is how much do you think of any and all panelists the crisis of '08 was a -- more of an investment deal base phenomena in that we have mbs and mortgage back, credit-back
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security insurance. these are not so much to me customer based products but deal based. entirely different culture, entirely different set of motivations, thoughts on that? >> we talk in the book, there's certainly a view held by a number of people in wall street as well that the problem was the salman brother's culture, unit of travelers was recently added, became married with citi and investment banking deal culture dominated and the reason i have trouble accepting that view is one as we talked about you had problems come with crisis across the board, commercial bank as
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well as investment bank and when you look at earlier history you mentioned reed, it was very competitive, the whole focus on the consumer side was marketing which, you know, a market culture and entrepreneurial culture is wonderful except sometimes when these institutions are playing with our money it's maybe not so wonderful and i think one thing we wondered in the book was if you did not have a government back-stop, would you have had a ceo who had not come from a background in evaluating credit, did not understand credit risk and it turns out that did not understand credit risks on the commercial lending side in the commercial bank. the problems that occurred in 70's, 80's, 90's make it
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difficult to say that it was the merger later that caused everything to go south. >> not to mention the fact too that a lot of these exotic instruments that they can lend more. it's allowing them to do what they want to do on the consumer side because they can package it off and ship it off. >> i might add that the commercial bank, citibank was the candidate for receivership, fdic, we tried to get details, some documents related to this but they seriously wanted to argue that we should talk about putting the commercial bank into receivership, there was no -- not that we saw any discussion of the need for putting the investment bank side into bankruptcy, equivalent. >> we will have to make one last question, quick answer if we can
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make -- >> i'm an exciti banker. did you try to interview citibankers because a lot of the information that you gathered was through secondary sources? >> james ahas a good story on that. >> we did speak to a lot of people, not so many on the record, you see the book, what's on the record but a lot of people involved in the crisis. i think still not wanting to speak on the record. i still want to point out that this is one issue in terms of the principals, ceo's during that period, there's very extensive testimony in
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aftermath, hearings were held on capitol hill. others didn't get too much attention. one of the virtues to have book is pointing some of those interviews that came out of the crisis inquiry commission not that you would disagree or agree with the conclusions and there's a lot of material there and we tried to highlight some of it that didn't get too much attention. >> folks, we are out of time, we are a small group so there would be opportunities for those who stay around to perhaps ask some questions directly to our speakers in our reception which is going to take place in the winter garden at front of the building but before we leave, i hope that you will please join me in thanking all of our participants for informative discussion.
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[applause] >> thank you very much. [applause] >> as part of book festival coverage, book tv spoke with white house correspondent april ryan about covering the trump administration. >> white house correspondent april ryan, reporting from the front lines of trump's white house. what's d


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